If you should have one financial New Year resolution this year it should be to “Pay Yourself First”. Confused? Allow me to explain by taking us back to the late 1920s. George S. Clason, an American author most often associated with his book “The Richest Man in Babylon”, published in 1926 , distributes financial advice through a collection of parables set 4,000 years ago in ancient Babylon. The book is regarded as a classic of personal financial advice.
The parables are told by a fictional Babylonian character called Arkad, a poor scribe who became the “richest man in Babylon”. Included in Arkad’s advice are the “Seven Cures” (how to generate money and wealth), and the “Five Laws of Gold” (how to protect and invest wealth). The main part of Arkad’s advice is around “paying yourself first”, “living within your means”, “investing in what you know”, the importance of “long-term saving”, and “home ownership”.
Coming back to the 21st century, the concept of “Paying yourself First” is still very much prevalent to the core of successful money management.
So what does ““Paying yourself First” really mean? The phrase refers to paying your own savings and investment accounts first which could be for retirement savings , emergency savings , kids college savings and any other savings goal you may have. By following this method, you are “paying” your future self first by saving for your long-term needs .
What tends to happen to most of us, is that you get paid and you start clearing out all our bills and then you start spending. Should they be anything left in your account before the next paycheck comes in, you think to yourself “Hey ! I got some extra cash here! I “need” that and I “need” this and POOF the money is gone. A day later you remember you actually needed to save for future goals ! With Paying yourself first, there is no end of month saving concerns, because you took care of your future needs first!
Imagine your pension fund trying to collect your monthly pension deductions from your bank account 30 days after you got paid, somehow I don’t think they’d find anything. That’s why such institutions take their deduction FIRST ! Hence paying your future self should carry the same importance and discipline. We need to take our financial obligations to our future selves just as seriously as our financial obligations to our landlords, banks, utility companies, Netflix, and everyone or everything else we dedicate our money to.
By adopting the pay yourself first concept, you are mentally establishing saving as a priority. You are telling yourself that your future is important too. You need to reverse the order in which your prioritize are set. Most of us spend our income in the following order: loan repayments and bills , fun then saving if anything is left. Start Paying yourself First and reverse the order to: saving and investing, loan repayments and bills , fun with what’s left over. By doing this, you are now setting the money for your future self aside before you find reasons to spend it.
How to actually pay yourself first and save money like a champion
- Step One: go over your budget and decide how much you can save each month
- Step Two: decide which goals you would want to invest in
- Step Three: create a monthly standing order to ensure its transferred automatically
- Step Four: review your investments year on year
This will forces you to reconfigure your spending in a way that helps you reach your goals.
Happy New Year !